Russia Formulates a Hybrid Economy
Summary
Over the past week the Kremlin has announced a series of impending
privatizations across the Russian oil industry, including a 4
percent share in Russia's largest oil firm, Lukoil. On the surface,
it seems that Russia under President Vladimir Putin is moving
boldly in the direction of Western style economic reforms, but this
is a misconception. While Putin's economic reform plans indeed call
for liberalizing and reducing central control over large sections
of the Russian economy, the petroleum industry will experience a
different type of reform. Market forces will be allowed to play a
greater role in Russia's petroleum industry, but Moscow will
maintain firm central control. Paradoxically, Russia's move to
"privatize" conceals steps toward nationalization, steps that will
create a hybrid economy.
Analysis
Market analysts are hailing Russia's new oil industry privatization
scheme as a Western oriented reform. The privatization plans should
raise $0.9 billion to $1.4 billion for the federal government -
more than triple last year's total - and include sales of stakes in
Russia's largest oil firm, Lukoil. But this is not the pro-market
action many Western observers believe. Moscow is not giving up
control. Foreign investors will be allowed to invest cash and
technology in Russia's petroleum infrastructure, increasing its
viability and productivity. But Moscow will maintain a chokehold on
the political decisions of which company will export what oil to
what market.
For example, Moscow plans to sell the entirety of its 85 percent
stake in the small oil firm Onako. But the Russian oil firms that
have expressed an interest in purchasing it - Lukoil, Yukos and
Sibneft - are partially government owned. Onako's most valuable
holding is a refinery on the border with Kazakstan - far too
strategically valuable to be allowed into foreign hands.
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Other privatizations, while allowing the possibility of foreign
ownership, are not nearly as comprehensive as the Onako sale.
Russia plans to privatize 19.68 percent of Slavneft, and 25 percent
of Rosneft - both oil firms. The sales still leave the government
with majority control. These partial privatizations will bring in
needed capital and perhaps even some new technology, but Moscow has
no intention of giving up its grasp on its lucrative petroleum
sector. In fact, decisions regarding the rumored privatizations of
Russia's single largest company - and source of tax income -
Gazprom, have been delayed until next year, according to State
Property Minister Farit Gazizullin.
In fact, rather than relaxing its grip on the petroleum industry,
Russia is consolidating the industry under a firmer hand. All of
Russia's oil must reach Russia's oil pipeline network before it can
be exported. Putin recently transferred the power from the oil
companies to the Fuel and Energy Ministry to coordinate exports on
these pipelines. This grants the federal government direct control
over the amount of oil each firm can export; thus the government
controls the income of each firm. Once completed, the Fuel and
Energy Ministry can easily funnel foreign investors to the handful
of firms it dominates.
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This is part of a coordinated effort to lock down control of the
energy sector. On May 11 the Russian Tax Ministry initiated
proceedings against 27 smaller Russian oil firms for tax arrears.
If the Tax Ministry - which is cooperating with the Fuel and Energy
Ministry - gets its way, those firms will lose the ability to
export until the back taxes are paid.
But Russia's oil companies - especially those with no foreign
connections - are cash-poor. Most of the boom from the recent high
oil prices has flowed directly into the Kremlin's coffers as export
taxes. Many of these smaller firms will be unable to come up with
approximately $125 million they collectively owe the government.
Like Onako, they will be snapped up by the larger oil concerns
bound by an increasingly tight government leash. This manipulation
of tax policy and export quotas casts the government in a gate-
keeping role. Market forces and investors handle the industry's
day-to-day operation, but Moscow keeps the hammer poised.
This wave of privatization and nationalization is coming at an
opportune time for Russia. Kazak Prime Minsiter Kasymzhomart
Tokayev announced May 10 that his country located a new oil field
in the Caspian, reported Reuters. This east Kashagan field could
hold as many as 30 billion barrels of oil - by far the largest
discovery of the post-Soviet period. Currently, almost all Kazak
oil is transported through Russia. Once the massive export pipeline
from Tengiz, Kazakstan, to Novorossiysk, Russia, is completed next
year - a pipeline that Russian interests dominate - this trend will
be further entrenched.
Beyond the oil industry, the Russian government will have a more
market-oriented approach - but not totally. Privatizations will
sweep through most of the 30,000 state-run companies as the
government partially withdraws from the economy, but there is
little danger of them ever being fully privatized. According to
Igor Shuvalov, head of the Federal Property Fund that oversees
privatization efforts, "We propose selling small packages of shares
in those companies while keeping control in the state's hands,"
reported the Moscow Times. However, Russia has no such plans to
relinquish its grip on the oil industry.

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